EIZ: In 2013, GDP Decline of 0.2 Percent

The estimate of gross domestic product for the past year indicates a decline of 1.9 percent, while a decline of 0.2 percent is expected this year, according to the latest forecast from the Economic Institute, Zagreb.

They emphasize that weak prospects for recovery in the eurozone this year and the continuation of negative trends in the Croatian economy have influenced the downward revision of forecasts.
– Domestic demand is decreasing, as are total investments, along with delays in the realization of announced projects in the public sector. However, in the second half of 2013, an intensification of investments is expected, which, together with the revival of foreign demand and the positive effects of EU membership, should lead to an economic recovery, with GDP growth of 1.5 percent in 2014, according to the latest analysis from the Economic Institute.

They expect the continuation of negative trends in the labor market, with high unemployment rates that will persist in 2014.
– Such forecasts are influenced by numerous uncertainties, such as the course of the EU accession process, expected costs and benefits of accession, and the long-term reaction of financial markets to the recent downgrade of the credit rating. To reduce these uncertainties, the Government is expected to decisively complete the remaining tasks regarding EU accession, strengthen absorption capacities for EU funds, accelerate structural reforms, and consider a budget rebalance that would include more realistic economic assumptions and a sustainable plan for the consolidation of public finances, the Institute explains.

Gross domestic product in the third quarter of 2012 decreased by 1.9 percent compared to the same quarter of the previous year, marking the fourth consecutive quarter of declining activity on a year-on-year basis. However, what concerns them the most is the situation in the labor market. Namely, since September, unemployment has sharply increased, and by the end of the year, the registered unemployment rate exceeded 21 percent, the last time this was recorded was in early 2003.
– Although the Government has made certain efforts towards fiscal consolidation and announced structural adjustments, this has not sufficiently encouraged financial markets under conditions of weak growth prospects, leading Standard & Poor’s to downgrade Croatia’s credit rating in November from the lowest investment grade to the highest speculative grade (BB+/B), they conclude in the analysis.

In seeking solutions to current economic problems, the Government heavily relies on stimulating public investments and removing administrative barriers to strengthen private investments. However, analysts from the Economic Institute, Zagreb believe that the volume of investments in 2013 will be significantly more modest than the Government has announced, forecasting a growth of 1.5 percent on an annual average basis. This modest growth, however, contains a gradual strengthening of investments starting from mid-2013, with more visible changes expected in 2014 with an investment growth of 5.7 percent.
The budget rebalance for 2012 and the budget for 2013 indicated a reduced ambition of the Government to implement fiscal consolidation from the expenditure side of the budget. Analysts from the Institute estimate that the fiscal rule from the Fiscal Responsibility Act was very likely not adhered to in 2012, and that the budget for 2013 is leading to a violation of that rule. New budget plans foresee a larger fiscal deficit than earlier projections, which is another indicator of the slowdown in the consolidation process.
They state that the forecasts were prepared under the influence of numerous uncertainties, highlighting the course of the EU accession process, expected costs and benefits of accession, and the long-term reaction of financial markets to the recent downgrade of the credit rating. To reduce uncertainties, the Government is expected to complete the remaining tasks regarding EU accession, strengthen absorption capacities for EU funds, accelerate structural reforms, and consider adopting a budget rebalance that would include more realistic economic assumptions and a sustainable plan for the consolidation of public finances.